2012-2020 US Debt clock runs out of numbers

[nipper]

In Reply To: disco stu's post @ Feb 7 2012, 09:07 AM

borning of austerity

????

[disco stu]

I read a very interesting article by PIMCO's Bill Gross over the weekend, but an unfortunate run in with a Norovirus has left me too laid up to consider responding, and coming into work today I've found the article still up on my screen (yes - being a timid bank worker fearful of a job cut I was in at work on Sat trying to curry good favour with the powers that be.... or maybe I was just catching up from work I should have done instead of skiving off to read SS?)

Anyhow the gist of Bill's point in his article was:

zero-bound interest rates do not always and necessarily force investors to take more risk by purchasing stocks or real estate, to cite the classic central bank thesis. 

Essentially as best as I can paraphrase his argument, when short term interest rates are very low, say 0.25% and the rest of the yield curve is particularily flat, eg US10Yrs at 2% (thanks to operation "Twist") and intersting problem develops. Basically rational investors will chose to simply park their money and prefer to earn ST interest at 0.25% and be guarranteed to get their money back, than risk investing in the LT, with at best the possibility of a couple more points of upside, all the while being exposed to massive amounts of downside duration risk, if interest rates merely move from 2% back to a more normal level for 10yrs of around 3.5 - 5%. Consequently the effect of zero interest rates is to suck forward investment funds, in terms of where people choose to place they funds, ie what would have otherwise been invested LT into the ST.

Why is this a problem? Banks are basically the transmission mechanism from the monetary policies of the central banks into the real economy, so just as investors become reluctant to invest in LT govt bonds, they suddenly become much more reluctant to invest in LT bank bonds (while text books classically defined banks as serving an intermidiatary role, of borrowing short and lending long, the outcome of the GFC has revealed the reality much more complex, banks have a combination of borrowing horizons, ranging from overnight, out to a 5 or 7 year bond, and heaven help any bank too reliant upon ST funding).

Basically the implication of Bill's viewpoint is that zero bound interest rates, are unlikely to cure credit crisis, infact they may accentuate the problem by making the risk reward pay off for investors choosing to invest LT less desireable, and then transmit that through to the banks, who are unable to source LT funding (or pay a much higher price for it) and then ultimately restrict LT credit to the wider economy, despite the appearance of massive amounts of liquidity being pumped into the system by central banks.... explaining the cunundrum of why all the central bank funds ultimately get parked back at the central bank earning 0.25% instead of being onlent into the wider economy.

Anyhow, the more interesting part of Bill's article is attached below:

When all yields approach the zero-bound, however, as in Japan for the past 10 years, and now in the US and selected “clean dirty shirt” sovereigns, then the dynamics may change. Money can become less liquid and frozen by “price” in addition to the classic liquidity trap explained by “risk.” 

Even if nodding in agreement, an observer might immediately comment that today’s yield curve is anything butflat and that might be true. Most short to intermediate Treasury yields, however, are dangerously close to the zero-bound which imply little if any room to fall: no margin, no air underneath those bond yields and therefore limited, if any, price appreciation. What incentive does a bank have to buy two-year Treasuries at 20 basis points when they can park overnight reserves with the Fed at 25? What incentives do investment managers or even individual investors have to take price risk with a five-, 10- or 30-year Treasury when there are multiples of downside price risk compared to appreciation? At 75 basis points, a five-year Treasury can only rationally appreciate by two more points, but theoretically can go down by an unlimited amount. Duration risk and flatness at the zero-bound, to make the simple point, can freeze and trap liquidity by convincing investors to hold cash as opposed to extend credit. 

Where else can one go, however? We can’t put $100 trillion of credit in a system-wide mattress, can we? Of course not, but we can move in that direction by delevering and refusing to extend maturities and duration. Recent central bank behaviour, including that of the US Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside. Still, zero-bound money may kill as opposed to create credit. Developed economies where these low yields reside may suffer accordingly. It may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper. 

Where does credit go when it dies? It goes back to where it came from. It delevers, it slows and inhibits economic growth, and it turns economic theory upside down, ultimately challenging the wisdom of policymakers. We’ll all be making this up as we go along for what may seem like an eternity. A 30-50 year virtuous cycle of credit expansion which has produced outsize paranormal returns for financial assets – bonds, stocks, real estate and commodities alike – is now delevering because of excessive “risk” and the “price” of money at the zero-bound. We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time.

[flower]

Profit opportunities knocking on your door---read Colin Twiggs latest.

[flower]

In Reply To: Mookie's post @ Feb 6 2012, 12:38 PM

Perhaps sell off all their gold for a start

That mookie opens up a whole new can of worms, since the question often asked is :
Does the US have the gold that is widely thought they own?
Reason the question remains unanswered is because no official audit of Fort Knox has been held for decades.
Why no audit?
Why does not the US publish any M3 (money supply stats)?

Answer those questions and just maybe the actual financial position of the US possibly becomes a whole lot worse.

[kahuna1]

In Reply To: Mookie's post @ Feb 6 2012, 12:38 PM

Hi,

Yes always solutions.

Value of US gold reserves is somewhere around 400 billion or about 3% of their current debt. Thats the official one, the contingent one at well over 40 trillion its about 1%. I have looked at these and other suggestions from asset sell offs to some secrety hoard or foreign reserves and even usuail all of the above which would mean the US ceased to operate without reserves ... they account for about 1.6 trillion vs an official debt 10 times this. Another 2 or so trillion if they sold the house ... still leaves it well short.

Bottom line and if you can find it ... the US needs to slash spending by around 40%, raise their federal tax take by about 50% ... neither of which is going to happen anytime soon. As such I suspect the offical debt number is 200% of GDP by 2020 and rises to 300% by 2025 and 400% by 2030 if its allowed. Numbers are well contained in the US congressional budget office projections the ones that use a realistic growth rate and inflation rate. Other studies usuing a zero or near zero inflation scenario still come up with the same outcome all be it by 2050.

Cheers

[Mookie]

In Reply To: kahuna1's post @ Feb 6 2012, 07:16 AM

Kahuna

I certainly wouldn't argue with someone having a plan and sticking to it. I also wouldn't argue with Jesse Livermore "Throughout all my years of investing I've found that the big money was never made in the buying or the selling. The big money was made in the waiting."

I don't agree though and am keen to captilalise on the multiple opportunities in the market and perhaps keep an eye out for a big crash where we might get some wonderful shorting opportunities.

The flip side of this argument is also whether the US can do anything to head off a debt induced crash. There are imo always solutions to problems no matter how complex. Perhaps sell off all their gold for a start. That would generate some decent coin...

[flower]

In Reply To: wren's post @ Feb 6 2012, 10:04 AM

"Everybody has said for the last ten years Gold is going to collapse any day"

No flower "everybody" did not say that Gold is going to collapse.Why make such patently foolish and incorrect statements. Is the idea to give the impression that you knew something that no other person in the knew?

I will refrain from posting the range of bookmarked posts from online "experts" over the last 13 years proving my statement, but change "everybody" to "most".

[wren]

In Reply To: flower's post @ Feb 6 2012, 09:53 AM

Said flower..........

"Everybody has said for the last ten years Gold is going to collapse any day"

No flower "everybody" did not say that Gold is going to collapse.Why make such patently foolish and incorrect statements. Is the idea to give the impression that you knew something that no other person in the knew?

[Dave_vic_ozz]

In Reply To: kahuna1's post @ Feb 6 2012, 07:16 AM

Just on Dow Chem for a moment.

I know a lot of chemicals are coming out of China in quantity. These are cash cow chems for Dow but confidence in suppliers have meant a switch. I have seen this to, my supprise, with my own eyes. QA at this end is always importaint but so far so good.

Like the BDI, I think you may need another look at Dow as an indicator.

2 cents.

dave

[flower]

In Reply To: dayz's post @ Feb 6 2012, 09:21 AM

The world is on the brink of economic chaos, that's a prerequisite.

dayz, that in itself is a matter of personal opinion. You have I think said that PM's are likely to benefit from any such chaos, so there you have one possible way to profit out of any crash/ette.

Don't know if you were trading during the tech boom that went so bust, I was, and vowed not to touch any of it with a barge pole, what a stupid mistake as a truckload of money was made. Of course we all knew it could not last and it didn't, but that didnt prevent money being made by the astute trader.

Everybody has said for the last ten years Gold is going to collapse any day, but it has not, so if you followed the gold gloomers 13 years ago, 13 years of opportunity would have been lost.

Very much an individual's market place IMO, some will way outperform others, as will the managed funds, wonder if it has anything to do with ones outlook on life--ie is ones glass half full or half empty--I'm not saying throw the house at the market but to be so pessemistic is self defeating surely--ignore the gurus I believe wren said, for once am in agreement!

Same applies today IMO, buy and hold is dead, but opportunities are not.